Question 1

The price of gold tends to rise during inflationary periods.

Accepted Answer

During inflationary periods, the value of currency decreases, leading investors to seek assets that maintain value, such as gold, causing its price to rise.

Question 2

The federal funds rate is the rate banks charge each other when they borrow reserves.

Accepted Answer

The federal funds rate is indeed the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.

Question 3

An easy monetary policy should generate a lower required return for common stock.

Accepted Answer

An easy monetary policy typically lowers interest rates, which reduces the cost of borrowing and can lead to higher investment and spending. This environment can boost corporate earnings and reduce the required rate of return on investments, including common stock, making them more attractive to investors.

Question 4

Open market operations involve the buying and selling of securities by the Federal Reserve.

Accepted Answer

Open market operations are the actions taken by a central bank, such as the Federal Reserve, to buy or sell securities in the open market to control the money supply and influence interest rates.

Question 5

If the Federal Reserve sells securities, that reduces commercial banks' capacity to lend.

Accepted Answer

When the Federal Reserve sells securities, it decreases the reserves of commercial banks, thereby reducing their capacity to create loans.

Question 6

An increase in stock prices is a lagging indicator of economic activity.

Accepted Answer

An increase in stock prices is typically considered a leading indicator of economic activity because it reflects investors' expectations for the future of the economy.

Question 7

An easy monetary policy increases the cost of credit.

Accepted Answer

An easy monetary policy typically lowers interest rates, making the cost of borrowing cheaper to stimulate economic growth.

Question 8

Monetary and fiscal policy may affect stock prices through their impact on corporate earnings.

Accepted Answer

Monetary and fiscal policies can influence economic conditions such as interest rates, inflation, and government spending, which in turn can affect corporate earnings and thus stock prices.

Question 9

M2 is a narrower definition of the money supply and excludes savings accounts in commercial banks.

Accepted Answer

M2 is a broader definition of the money supply that includes M1 (cash and checking deposits) as well as savings accounts, money market accounts, and other near-money assets.

Question 10

Economies go through regular, identifiable cycles that can be forecasted with accuracy.

Accepted Answer

While economies do experience cycles, such as expansions and recessions, accurately forecasting the timing, duration, and severity of these cycles is extremely challenging due to the complex interplay of numerous unpredictable factors, including political events, technological changes, and natural disasters.

Question 11

An increase in the expected rate of inflation suggests that investors should sell the stocks of natural resource companies (e.g., gold and silver).

Accepted Answer

An increase in the expected rate of inflation often leads investors to buy stocks of natural resource companies, such as gold and silver, as these are considered hedges against inflation.

Question 12

Deflation is a period of rising employment.

Accepted Answer

Deflation is a period of decreasing general price levels in an economy, not directly related to employment levels. Rising employment is typically associated with economic growth, not deflation.

Question 13

An increase in the targeted federal funds rate implies that the Fed is buying securities.

Accepted Answer

An increase in the targeted federal funds rate implies that the Fed is likely selling securities to tighten monetary policy, not buying them. Buying securities would typically be associated with lowering the federal funds rate to inject liquidity into the banking system.

Question 14

If the country's exports increase, GDP declines.

Accepted Answer

An increase in a country's exports typically leads to an increase in GDP, as exports are a component of GDP calculation, contributing positively to the country's economic output.

Question 15

The federal funds rate is the rate the federal government pays when it borrows funds.

Accepted Answer

The federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. It is not the rate the federal government pays when it borrows funds; that rate is determined by the yield on Treasury securities.

Question 16

A recession is a period of rising employment.

Accepted Answer

A recession is typically characterized by a decline in economic activity, leading to reduced industrial production, sales, and often an increase in unemployment, not rising employment.

Question 17

The money supply, defined as M1, includes currency, coins, and checking accounts.

Accepted Answer

M1 is a category of the money supply that includes all physical money like coins and currency, as well as demand deposits, checking accounts, and negotiable order of withdrawal (NOW) accounts.

Question 18

Gross domestic product (GDP)is the sum of spending on consumer goods, government spending, and investing in stocks and bonds.

Accepted Answer

Gross Domestic Product (GDP) is the sum of spending on consumer goods, government spending, investments in business capital, and net exports (exports minus imports), but it does not include investing in stocks and bonds as those are considered financial transactions, not production of goods or services.

Question 19

The Federal Reserve is the central bank of the United States.

Accepted Answer

The Federal Reserve, often referred to as the Fed, is indeed the central banking system of the United States, responsible for setting monetary policy, supervising and regulating banks, maintaining financial stability, and providing banking services to depository institutions, the U.S. government, and foreign official institutions.

Question 20

Changes in the price of gold are often related to the anticipation of inflation.

Accepted Answer

Gold is often seen as a hedge against inflation, so its price can increase when investors anticipate higher inflation, as they buy gold to protect their purchasing power.

Quiz 11: The Macroeconomic Environment for Investment Decisions